Business Strategies

S Corporation Shareholder-Employee Reasonable Compensation

The S corporation is a powerful tool for small business owners to manage their business efficiently and reduce payroll taxes on owner’s profits.

The primary benefit small business owners get, when organized as an S corporation, is the opportunity to avoid payroll taxes on distributions after paying reasonable compensation. A reasonable wage/salary is a must for shareholder-employee/s. However, the shareholder-employee soon discovers that the lower her wage is, the lower the payroll taxes. Why not pay no wage? Or only a token wage?

Of course, the IRS knows those tricks and requires the company to pay “reasonable compensation” to shareholder-employees so they’ll submit proper payroll taxes. The IRS can adjust wages to reflect reasonable compensation. Family members of the shareholder must also receive reasonable compensation for services rendered.

In this article we will begin by debunking urban legends surrounding S corporation reasonable compensation followed by calculating a reasonable compensation package before finishing with a strategy.

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